Saturday, March 7, 2009

As reported by Russell Gold at Environmental Capital, ExxonMobil CEO Rex Tillerson has made an incisive new argument against his company’s investing in government-dependent renewable energy.

“If I wanted to kill [tax subsidies], the thing to do is for Exxon Mobil to go and invest heavily in them and then Congress would immediately cancel the tax subsidy. Actually what they would do is they would just cancel it for us,” said Mr.Tillerson, during the annual analyst meeting at the New York Stock Exchange.

He added: “In reality, that is what I fear would happen. So we are not going to go into investments that are dependent on a government providing a tax system to make them viable.”

This is very interesting. Former ExxonMobil CEO Lee Raymond and now Tillerson have argued against investing in politically dependent renewables because they have been-there-done-that, with investor losses in the 1970s. And looking at the present and future technology of wind and solar relative to what ExxonMobil can realistically add, they are not sanguine about going forward in the same area.

But Tillerson is now saying something new: If ExxonMobil were to enter the wind and solar market, then a clause in any new legislation could exclude the oil major from getting the production tax credit.

Say the venture is profitable on a bed of special government favor. The green scream would that the “polluter” is using profits from the “clean side” to subsidize the “dirty side.” Therefore, each company—perhaps of a certain size—should be subject to an “average emission test” under which taxpayer subsidies cannot be received if its overall energy production contains too much greenhouse-gas-emitting (oil and coal) energy production.

Thinking ahead in this way, a “green” strategy would be to get a company “hooked” on subsidies and then ratchet up the pressure on that firm to reduce its legitimate, consumer-driven, core energy activities. ExxonMobil is just smart enough to sniff this one out.

Russell Gold’s post continues:

Putting aside Mr. Tillerson’s dark commentary on how unpopular the company is in Washington D.C., he raises a point investors might want to consider.

Renewable energy has a lot of promise and hype, but it still needs government support. It is clearly getting that support today, but how long will the government policy underwrite renewable energy? How long will it be able to afford to underwrite renewable energy? How long will voters support green initiatives that create extra costs during this prolonged economic downturn?

This is good journalism reporting a worthy corporate stance—a rare one-two in today’s politicized discourse over energy policy.

What a great moment for free-market capitalism’s principled entrepreneurship, ™ when so much of corporate America is involved in political capitalism. Is there any doubt that ExxonMobil would be Adam Smith’s favorite company? It is certainly the consumer’s friend and the taxpayer’s friend.

Compare Raymond and Tillerson to the political entrepreneurs of the energy field such as the late Ken Lay (Enron), the disgraced John Browne (BP), and the value destroyer T. Boone Pickens (Mesa Petroleum, BP Capital). The best can still win in corporate America.

Perversely, for the second year in a row, a group of Rockefeller descendants are backing a shareholder resolution to have ExxonMobil invest in renewable energy, as reported in the Wall Street Journal. My response to this is: “Don’t Enron Exxon.” (Enron left its natural gas core to invest in solar, wind, energy efficiency, and so forth, with uniformly bad results.) The disgruntled heirs of John D. have the energy sustainability vision of Ken Lay. They should not only leave well enough alone, they should rethink their whole political philosophy and applaud the management of what is now America’s star company.

Postscript: The Fall of General Electric

Which brings up the sad tale of another company. Once in a league with ExxonMobil, General Electric is badly wounded because of mismanagement. I remember back in my Enron days when I took a phone call from GE Capital (my bosses were busy). The caller said that GE was considering adopting a company policy of no longer financing coal projects.

Corporate social responsibility, no doubt. Never mind that coal is middle-class energy and that climate alarm was and is exaggerated. Rather than focusing on consumers, GE was playing the political correctness game, as it was when it purchased Enron Wind Corporation, now GE Wind. Evidently, such form-over-substance promiscuity (the Enron disease) later spread to other areas at GE Capital.

In his March 7th weekly address, the President capped off a busy week in Washington remarking on new lending guidelines aimed at lowering mortgage payments; an initiative to generate funds for small business and college loans; the release of his administration's first budget which includes $2T in deficit reduction, and the start of long overdue health care reform.

As time passes, the skepticism grows about the ability of government funding for “green jobs” to simultaneously (a) pull the economy out of recession and (b) reduce the risk of climate change. In the March 4 edition of Slate–hardly a bastion of reactionary conservatism–Senior Fellow Michael Levi of the Council on Foreign Relations took the greenwash off of “green jobs” in the essay, ”Barking Up the Wrong Tree: Why green jobs may not save the economy or the environment.” Levi also directs CFR’s Program on Energy Security and Climate Change.

At first it sounds as if Levi is merely echoing the thoughts of Harvard’s Robert Stavins, who has recently been pointing out that it’s not necessarily optimal to try to use a single-bullet policy to address two different objectives. (This led to criticism from the always-entertaining Joe Romm that Stavins was incapable of walking and chewing gum at the same time.) Along the same lines of Stavins’ argument, Levi writes:

But just because “green” and “jobs” are both in demand doesn’t mean that policies focused on creating “green jobs” make sense. In fact, a close look at the economics of “green jobs” suggests that if we try to find a lasting solution to these challenges with a single set of policies, we might fail to deliver on both fronts.

But Levi doesn’t stop there. He goes on to challenge the efficacy of government funding for green jobs itself:

The fundamental problem is that there’s no solid evidence that green policies—even those aimed explicitly at creating jobs—will actually lower the long-term unemployment rate. Most of the research on how these sorts of programs might build up the work force simply tallies the payrolls, current or projected, of companies in renewable energy and other sectors…This approach is a natural winner: Green policies inevitably generate jobs in green industries, so the studies inevitably deliver good news. But skeptics argue that simple windmill-counting ignores an important fact: Every unit of energy generated from alternative sources displaces a similar amount generated by traditional means, so forgoing those other energy sources means giving up whatever jobs they were providing. This doesn’t mean that greening the economy will have no net impact on jobs, but it muddies the math considerably.

Levi has done his homework; he knows that the proponents of green jobs have a good comeback to the above argument. But then Levi gives the response to that:

[In response to my objection above,] the green jobs community…points out that a dollar spent on renewable energy or higher energy efficiency will generate more U.S. jobs than a dollar spent on traditional power. That’s probably true, since many green jobs are labor-intensive and clean energy is more likely to be generated at home rather than to be imported. But this misses a critical point, too: The dollar spent on green sources also generates less energy. (Renewables will be more expensive than traditional power for the foreseeable future.) Part of the gap can be closed by energy conservation, but other money will need to be diverted from elsewhere in the economy to make up for the remaining energy shortfall. The result is a loss of jobs somewhere else.

My point in the present blog post is not to definitively settle the score; for a more comprehensive analysis, I point readers to the study I co-authored with Robert Michaels on green jobs. What I am warning about is that many of the estimates of green jobs (that allegedly will be created by government funding) commit very naive mistakes.

To give a diferent example from the ones Levi discusses: Just the other day I heard a politician at the federal level (I forget who it was) talking about the “green” provisions in the stimulus bill. And the questioner asked whether the critics were right, when they said that cap and trade would harm the economy. In response, the politician pointed out all the jobs that would be created through the need to retrofit buildings, switch to alternative energy sources, etc.

This is crazy talk. Someone like Yale’s William Nordhaus can make a plausible case (.pdf) for a carbon tax, using the climate models of the IPCC (and in my opinion a heroic faith in the governments of the world to “get it right”). But Nordhaus is a sensible economist and recognizes that you don’t help the private sector by saddling it with another set of constraints. According to the politician’s logic, if the government required that all buildings be outfitted with polka dot wallpaper, it would stimulate the economy.*

* Unfortunately, there are Nobel laureates who would say that with a straight face. These days it’s getting hard to come up with a reductio ad absurdum…